Bernanke "Punts" and Bonds Don't Like It

We got a big giant nothingburger from Ben Bernanke despite a sharp revision in Q2 GDP growth down to 1.6% from 2.4%.

The market cheered the news as stocks jumped over 1 percent.  Many economists were looking for a revision down to 1.4% so the market breathed a sigh of relief.  We were also pretty oversold although I wasn't too impressed with the rally(more later). 

The bond market however was not very happy. The 10 year sold off violently following the news from Bernanke:

My Take:

Now lets not get too excited over this move because it's only one day.  However, it is something that you need to take notice of.

I believe that many were piling into treasuries this week thinking that they could front run a possible QE announcement by the Fed.  Bernanke's speech today was a big disappointment to those who made that bet.

Ben did not rule out the option but he did say he needs to see "significant deterioration" before proceeding with more QE.

I'll give Ben some kudos for his actions today.  As I have repeatedly said:  More QE will do nothing but waste more taxpayer dollars.

Lower rates have done nothing to stimulate lending.  Giving more money to the banks will do nothing because they aren't lending and Main St has no desire to borrow it anyway.

Another QE would have been a potential disaster because it would have put the dollar at serious risk.  I do think we will eventually see another QE because the economy continues to worsen.

We saw further evidence of the slowdown after Intel came out and warned today:

"SAN FRANCISCO/NEW YORK (Reuters) – Intel Corp warned that third-quarter revenue could fall short of its own estimates by more than $1 billion, reinforcing doubts about the strength of a technology sector recovery.


But shares in the industry bellwether, which dominates the market for PC microprocessors, gained 1.05 percent on Friday because investors had braced for bad news and were relieved the downward revision had not been worse."

Quick Take:

I included the second paragraph because it cracks me up.  Every piece of bad news is continually spun positively.  If it's not spun positively then you can almost guarantee that you will some sort of saying that the news was "worse than expected".

Folks, anyone with a brain in their head should not be surprised by any of the news.  The economy is in shambles.  The Fed is pretty much out of bullets.  Ben stayed calm today and did nothing which was the right thing to do.

The problem is there is really nothing left that he can do.  The Fed can't make people borrow money. 

The housing numbers this told you all you needed to know:  We saw record low sales(-27% yoy) at a time where lending rates were at an all time low.

Demographics

The AP reported today that birth rates were the lowest seen in 100 years:

"The U.S. birth rate has dropped for the second year in a row, and experts think the wrenching recession led many people to put off having children. The 2009 birth rate also set a record: lowest in a century."

This trend is alarming and should continue as families lose confidence in their ability to raise a family.  You gotta wonder who is going to replace all of the aging baby boomers as they become net sellers of stocks as they retire(that is if they have anything left after losing 50% twice in the past 10 years)

The Bottom Line


I was not all that impressed by the rally today. 

You should have seen a much bigger move in stocks given the huge amounts of money that came out of bonds today.

Where did all the money go that came out of bonds?

Metals and commodities were pretty flat so it didn't go there.  I would be curious to see what the money market fund flows were today.  Perhaps some central bankers decided to sell their treasuries in an attempt to start getting their money out of the US?

Time will tell.  Needless to say I wasn't impressed with the price action today.

There are some big numbers that are coming out of China next week so perhaps Wall St decided to just take a breather. 

That's fine with me.  This was another long week for investors.  I think it's time for a cocktail so I will end things here.

Until next week!

Foreclosure Starts Surge 24.5% in July

I will be brief tonight because the market moving news will come out tomorrow when we get the GDP revision and then hear from the Fed.

I wanted to touch real quick on the reported second quarter "improvement" in the foreclosure data from MBA today.

Here is the headline from the piece above:

"CHICAGO (MarketWatch) -- The percentage of homes somewhere in the foreclosure process fell in the second quarter, the first drop since 2006 and the largest quarter-to-quarter drop since 2005, the Mortgage Bankers Association said Thursday."

Great news right?  umm...Yeah until you take a look at July.

Before I continue let me note that I pretty have pretty much ignored all of the second quarter housing data because the tax credit distorted the numbers so badly.

We can now start paying attention to the data again because all of the tax credit buyers finished up in Q2.

As you can see below, Q3 sure isn't starting off on the right foot"

CNBC got a sneak peak of the July foreclosure numbers and they were flat out gruesome.

"The Realty Check got a first look at an upcoming report from Lender Processing Services which shows a huge jump up in foreclosure starts in July. "July showed an astounding 24.5 percent month-over-month increase in foreclosure starts, which dovetails with Treasury's latest report on HAMP [Home Affordable Modification Program] cancellations (approx. 50% according to Treasury's numbers)." It also reports that seriously delinquent (6 mos.+) cures have declined by 25 percent. Cures are loans that are made current again. So with fewer cures and more newly delinquent loans, that 90-day delinquency bucket is increasing, hence more foreclosures again."

Quick Take:

It looks like foreclosures are once again starting to heat up.  I can't even describe what a 24% increase in foreclosures is going to do to housing prices.

Making matters even worse is the fact that we are now heading into the slowest season for housing.

I am surprised the banks puked up this many new foreclosures all at once.  To date they have sat on them in order to keep the number of outstanding foreclosures to a minimum in order to support housing prices.

If this new foreclosure trend continues it's going to be a long cold winter for the housing market.
I will be back with full coverage of tomorrow's big events.  Hold onto your trading accounts, tomorrow could be a doozy.

Corporations are Walking Away: Why Can't You?

I wanted to start off with a great Tech Ticker tonight that discusses why it's OK to "walk away" from a house:



My Take

The Tech ticker guys make some excellent points here.  No one should feel guilty if they decide to walk away.  Big business is now doing it it so why shouldn't you be able to?

The double standard that Wall St tries preaches when they tell us that we have "morale" obligation to pay back the loan is absolutely ludicrous. Where were their morals when they goosed you into over paying for the asset in the first place?

The reality here is you are simply making a prudent business decision.

You were sold a bill of goods by everyone involved in selling you the house in the first place.  This included the appraisers, the banks, the Realtors, and the regulators.

The whole housing bubble was nothing but a giant fraud.  This no longer needs to be proven.  The evidence is everywhere.  Everyone was in on the scam from the banks all the way down to the ratings agencies who gave this "bubble" mortgage debt "AAA" debt ratings.

If you are one of the 25% of the borrowers that made a huge mistake and bought at the top, then you should really sit down and think about whether or not you want to spend the next 30 years paying off a mortgage on an asset that might be worth 50% less than what you paid for it.

I mean think about it:  How much sense does that make especially if you are struggling to make the payment every month?

Remember:  The banks are to blame just as much as you are because they gave you the money to do it in the first place.  They are too blame just as much as you are because they allowed you to do it!

The fact that the whole market collapsed is not your fault and you shouldn't be penalized for it for the next 30 years!

Of course their are other factors that you need to consider if you decide to walk.  I suggest that you sit down with a real estate/BK attorney or a financial planner to discuss the ramifications of making this decision.

I was one of the lucky ones who sold in 2005 and it was nothing but pure luck because because I had to move to take another job. 

However, if I found myself in a situation where I was badly underwater, I would walk away in a heartbeat.

Look at it this way:   This probably the best way to get back at Wall St for destroying our economy and then using our tax dollars to resurrect themselves.

If your economic security has been taken from you during this process then it's all the more reason to pull the plug on the mortgage. 

Payback is a bitch and I wouldn't shed one tear for any of the banks if the home owners who were scammed by the banksters all decided to shove it up Wall St's behind by deciding to walk away.

The Bottom Line

A few tidbits on the markets.  Today was a pretty ho hum session.  Silver is really starting to break out.  Gold was strong today also.

I think many investors who are now loaded up to their necks in bonds after the huge treasury rally are now looking for ways to diversify out of the dollar.

I would not be surprised to see the metals do well as a result.

The big fear right now for many investors at this point is the dollar.  The way I see it they have every right to be.   They are also afraid of their treasury holdings because they are all priced in dollars.

Why are they afraid?

If inflation then everyone(including the banks) that loaded up on bonds on the longer end of the curve will automatically get vaporized.

All you have to do is look at what happened to the banks that were loaded up on these bonds during the early 1980's when Volker took rates up to double digits:

Basically if you look above, you were absolutely murdered if you bought the long end of the bond curve in 1977 and early '78. 

1977 dated 30 year bonds at a 4.5% yield don't look very attractive when you could buy ones during the 1979-1981 time frame that yielded double digits.  

This is why I believe it's nuts to see everyone running into 30 year bonds that yield only 3.5%.  If we see just one bout of inflation then the holders of this paper will slaughtered in two ways: 

1.  Let's for numbers sake say Inflation rises to say 10% annually:  You are guaranteed a 6.5% loss on your principle each year with a 3.5% yield in such a scenario.

2.  The Fed will likely raise rates to quell inflation which will then increase the yields on treasuries as they sell off.  The value of the actual 3.5% yielding 30 year bond then collapses because you can buy newly issued bonds at much higher yields.

In my opinion this is why you should ONLY buy bonds on the short end of the curve.  Don't get sucked in to trying to chase a measly 3.5% yield.  The risk of inflation might not be here now but it likely will be 5 years from now or even sooner for that matter. 
This is why I have been tending to "tune out" all of the deflation chatter recently.

Many deflationists claim that gold is useless in a collapse because it cannot be easily used if we collapse.  Some refer to it as nothing but a doorstop if Mad Max hits. 

They also correctly point out that the dollar usually rises and has more value during deflation because assets come down in price which gives the dollar more bang for its buck.

This is all well and good IF the dollar survives.  I tend to look at the other side of it.  What if it's the dollar collapses or becomes worthless? 

The way I see it:  The dollar is nothing but a piece of paper with ink on it that's backed by a country that is technically bankrupt instead of being backed by something of actual real value such as gold.

Am I supposed to feel safe holding this green paper stuff? HA!...Yeah OK!.  Call me a skeptic. 

Let me be the first to say that I am no gold bug.  However, I do own both gold and silver because there is no guarantee that the dollar is safe.

In fact, I could very easily see the dollar collapse.  If we see a QE2 I fully expect the dollar to get smashed. 

How can the dollar hold it's value when the government is creating trillions of them each year?

To be fair they are technically "cleansing" the dollars by selling treasuries.  However, when you really think about it, who is buying the treasuries if we do another QE2?  The government!

Technically we will  essentially be financing ourselves under the "QE" scenario.  How on earth the dollar holds its value longer term in this situation is beyond me.  I have never seen such a total cluster(you know what I mean) in my whole entire life.

The people left standing when this depression is over are the ones who are diversified.  This is not investment advice but I do believe that one must protect themselves from both inflation and deflation because we are going to see both before we get through this.

Please be careful out there and stay nimble!

Disclosure:  No new positions taken at the time of publication.

Are We Now in a Depression?

Famed economist David Rosenberg thinks so.  David's piece starts at the 6:30 minute mark on the video if you want to skip through the Fast Money babble:




My Take:

It's time to call a spade a spade.  Without the government stimulus statistically we would already be in a depression.  

I agree with David, after today's housing numbers you can be asssured that we are definately in a depression.  Money continues to soar into bonds.  Millions are scared and unemployed.  Home sales dropped a whopping 27%  despite record low interest rates. 

Will it be our Greatest Depression?  This remains to be seen.  What I love about Rosenberg is he is able to go back in history and recognize that this is not a normal recession.

Virtually every economist that I read or listen to consistently tries to compare this recession to the mild ones we have seen since The Great Depression. 

The problem with analysis like this is you are not comparing apples to apples.  What we experienced in 2008 was every bit as bad as the credit collapse in 1929.  The one key difference is the government responded much more rapidly this go around.

Nonetheless, the crash this go around was just as severe if not worse.  Therefore, when you are trying to use economic models to try and predict how we will recover from a catastrophic collapse, you must use models that resemble a catastrophic sollapse.  The last period that we experienced anything like this was in the 1930's.

IMO, if you fail to make the 1930's scenario a key part of your economic model then your economic analysis becomes both invalid and irrelevant. 

As David brilliantly explains:  The emotional scars from such an event are just as important as the statistics.

When you are knocked down by an economic version of Hurricane Katrina you don't immediately stand back up and say "Wow, that sucked, Let's go buy a house!".

Essentially this is what many of the bulltards think.  Most economists expect our economy to bounce right back as a result of the Fed's "wonderful" stimulus. 

I am sorry folks but it doesn't work that way when you are just getting back on your feet after getting bombarded by a job loss, foreclosure, bankruptcy or a combination of all three.

Markets are very psychological and they always have been.  When people lack confidence in the economy like they do now they lose their "animal spirits".  Just look at the bond markets right now if you need proof of this!

Let's take a psychological look at how Main St must be feeling right now:

Before we start start:  Let's remember that Main St is still badly "scarred" by the fact that they lost 50% of their 401k's twice in the last decade.

Now add this to the mix:

-  Millions are now losing their jobs as a result of the crash of 2008.
-  Many are now finally realizing their losses in housing.
-  They are now making zero yield on what little money they have saved.
-  They see millions of people panicking into bonds which creates more fear.
-  Their stock investments have turned highly volatile which has made them even more nervous.

This financial hurricane has given Main St. a bad case of PTSD(post traumatic stress disorder).  Can you blame them?

It's going to take years before anyone has any real desire to take on serious risk.   We are not going to "bounce back" from this like we have during our previous small recessions because it's a depression not a recession.

It's time for the Wall St economists to start treating it as so.  If they don't than they most assuredly will drive their clients right off a cliff because their interpretations of the data will be highly inaccurate.

Just think about how many of them got it wrong in 2008 as they failed to recognize the severity of the problem?  The examples are endlesss.

Housing

I wanted to spend a little time here before The Bottom Line.  Let's take a closer look at the July home sales debacle:

Quick Take:

I just wanted to highlight a few things here.  First of all, the area of the market that took the biggest hit was the mid to lower end of the market (-500k).  This was likely a result of the ending of the tax credit.

The problem we have here is look at where the majority of home sales were seen.  A whopping 89% of the sales were in the (-500k) or less category.  66% of the sales in July were seen in the lower end of the housing market(-250k) or less category. 

So essentially the strongest part of the housing market from a sales perspective in July was where we saw the largest drop off in sales.

This does not bode well for future.  Let's also note that there is now 12.5 months of inventory which is a record and twice the level of a healthy market.

We should also not be surprised that the lower end of the market is what is moving.  The reason for this of course is people can qualify for a mortgage because homes become affordable relative to incomes at these levels. 

It's a virtual guarantee that almost all home sales will be in the 250k and less category in the future once lending standards begin to rise.  Only the rich will be buying homes for 500k and up moving forward.



Also of note:

CNBC had a real estate attorney on today that estimated there were a mind boggling 7 million additional homes in shadow investories.  Her estimation was on average these homes would have to be sold at an additional 30% discount from current levels in order to clear them out.

Today was not a good day for the housing industry to say the least..

The Bottom Line

So what does this all mean from a market perspective?  Longer term it's not good.  The 10 year once again soared today:

Yields closed under 2.5%.  This parabolic move has me totally speechless folks.  It makes me absolutely petrified for the future. 

I have decided that it's time to sell some PTTRX because it's my largest holding. 

I have held this for 4 years and it's been a great ride but I feel like the best times are behind us when it comes to bonds. 

As I said earlier this week once the 10 year got under 2.5% I was more interested in the short side than the long side.  That being said after watching the market this week:  I decided that I can't short treasuries because I don't know where else the money can go until we see more economic data. 

The way I see it there are three scenarios that will likely play out when it comes to the bond bubble:

1. Treasuries will continue to rise as the economic data continues to get worse(which I believe it will).  This is a fear trade folks.  The worst the data gets the more appealing bonds will look for desperate investors.

Stocks will likely continue to fall during this scenario as the money continues to flock into bonds.  We have been seeing this trade over the past week or so.

2.  Treasuries drop as the economic data improves(I doubt this one).  This could also create a powerful rally in the stock market.

3. Treasuries collapse as concerns around our deficit increase.  Let's call this the "Greece" scenario.   BTW, there was a debt downgrade on Ireland after hours.

If scenario three hits then you can expect both stocks and bonds to sell off.  This scenario for the short term is the most unlikely one.  Nonetheless, I believe the risk of it ocurring is very real.

Of all of the scenarios I think #1 is the most likely conclusion for now.  We could see a bounce or two of course, but the trend will be downward if the economic data worsens because Wall St. will become more terrified of delfation.

The one thing that could change all of this is the potential of a QE2 by the Fed.  Goldman was out calling for another trillion in QE today.  I know shocker right?....Sigh

I will end it here today.  Until next time!

Disclosure:  No new positions taken at the time of publication.

Existing Home Sales Plummet 27.2 Percent

Ouch...This is going to leave a mark:

"WASHINGTON (Reuters) - Sales of previously owned U.S. homes dropped more steeply than expected in July to their lowest pace in 15 years, an industry group said on Tuesday, implying further loss of momentum in the economic recovery.


The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. June's sales pace was revised down to a 5.26 million-unit pace.

Analysts polled by Reuters expected existing home sales to tumble 12 percent to a 4.70 million-unit pace from the previously reported 5.37 million units in June."

Quick Take:

I had heard a whisper number of -20% but I never could have imagined a number this bad.

So Let me get this straight:  We are now seeing the largest drops in home sales in 15 years at a time when rates are at an all time low?

Ummm...Question here:

Mr.  Bernanke:  Wasn't lower rates supposed to stimulate borrowing?

There were also reports today that there is increasing dissension at the Fed about what direction the central bank needs to take moving forward.

As you can see above, the zero interest rates policy has been a catastrophic failure.  The only zero interest rate winners are the banks.  I know shocker right?  The biggest losers as a result of this policy are the prudent savers who are unable to earn any yield.

Is this how America works now?  Reward the criminals who destroyed the financial system at the expense of the people who have fiscally done the right thing?

It's time for a change America and I suggest you make your voice heard during the elections in November.

More later today.

Are Investors Fearful of Deflation or are they Just Plain Scared?

I thought a lot about the idea of a bond bubble over the weekend.  The USA Today laid out both sides of the bond debate today in tightly wrapped clear and concise piece:

"The risk is that just as tech stock investors thought the good times would never end, current bond fund investors have a too pessimistic view of the future.

The anti-bubble crowd, including David Rosenberg of Gluskin Sheff and Julian Jessop of Capital Economics, argues that the massive shift into bonds is rational. They say that low yields make financial sense because inflation is virtually non-existent, the Federal Reserve has said short-term rates will remain near 0% for a long time, the economic recovery is losing steam, and risk assets such as stocks are performing erratically.

Those warning of trouble ahead point out that investors are leaving stock mutual funds and piling into bond funds, including funds that invest in Treasuries, in an extreme fashion. Since the start of 2008, bond funds have had $601 billion of cash inflows, vs. outflows of $240 billion for stock funds, the Investment Company Institute says."

My Take:

The "bond bubble" debate dominated the blogosphere today.  I also noticed that the inflationists and the deflationists were all over each other as Wall St tries and figure out what in the hell is going on in the capital markets.  You can tell this flight to safety is freaking a lot of people out.

I have pretty much concluded that all options are on the table at this point.  When I look at the market all I see is fear.  I don't see fear of deflation.  When I look at the flight into bonds I see petrified investors with no answers.

When I look at the anemic volumes I see investors that are so afraid they are paralyzed so they do nothing.

Conversation With a Wall Street Banker

When I spoke to my best source on Wall St this weekend I got a similar reaction.  Here were some of his quotes:

"Jeff, money is scared right now"
"nothing looks safe"

We also talked about the Druckenmiller getting out of the game:

"This just shows you how tough things are out there"
"No one knows where to put money to work"

We also discussed shorting the bond market and on this point and he was hesitant. He didn't think getting out in front of this in either direction was a very good idea.

I must admit it was a strange discussion.  It was not the normal banter that we usually have when we debate the markets.   The one feeling that kept hitting me during this conversation was how quiet he was. 

This is extremely rare because he is NEVER at a loss for words.  He's also a person that I have a tremendous amount of respect for because of his experience.

The conversation was almost surreal for me: I mean here I am talking shop with a grizzled Wall St veteran who has 42 years of Wall St experience in stocks, bonds, and the securitization markets and he's speechless when it comes to having any conclusions about the market.

The way Wall St. is trading right now you can tell that he is not alone.

Here is the last point he made to me:

"I am glad I am not your age because this is going to be one hell of a mess to clean up"

Needless to say I didn't feel any better about our situation after we finished our talk.

The Bottom Line

I don't see any confidence in the market right now.  The best of the best are petrified and are hiding in treasuries because they are unable to make sense of what is going on right now.

The deflation trade is on in bonds but it's not on in other areas that it should be if we were witnessing true deflation.   If this were a true classic deflationary panic then answer these questions for me: 

Why is gold holding firm at $1200 when the CPI is flat or declining?

Why are commodities soaring in such a deflationary environment?

Why is the Yen soaring against the dollar?

Why aren't stocks collapsing ?

None of this makes any sense.  I can see why some of the big players are walking away from the game.  I would be taking my billions and walking away too at this point.

The deflationists and the Inflationists are going to go ballistic battling each other over the coming weeks.  I for one don't see either choice as an "all or nothing" scenario.

Trying to paint the markets with a broad brush and saying everything will drop or rise as a result of deflation or inflation is silly.

I for one believe that this deflationary panic into bonds is a temporary phenomenon.  Inflation is the only way we will really get out of this in the long run.  It will likely be through a currency devaluation(more on this on a later post).

Meanwhile, as we obsess over deflation,  other parts of the world are currently battling inflation.  Hat tip to Itulip.  India is seeing serious inflation despite higher unemployment:

My only take on all of this is it's very easy to get confused when half the world is fearing deflation while the other half is experiencing the exact opposite. You can see why investors around the world are sitting on their hands.

One thing for now is for sure:

Investors are scared to death.  What worries me about all of this fear is people tend to panic when they are fearful.

When people panic they often make VERY bad decisions.  The fact that investors are avoiding stocks and staying in treasuries at zero yield tells me that there is very little confidence in the stock market.

If we see a panic it will likely be to the downside in stocks.  The fact that stocks are not going up right now when bonds are yielding nothing tells you all you need to know when it comes to the appetite for equities.

If bonds start to drop I think you may start seeing money going underneath the mattress as confidence in all assets becomes lost.  I wish I was kidding.  I think its that bad folks. 

I wish I had some strong advice as to what to do at this point.  The only thing I can say right now is hedge yourself for deflation(dollars, bonds) and inflation(commodities/Metals) and just hope that this the whole banking system doesn't collapse.

Disclosure:  No new positions at the time of publication.

7 Reasons To Not Buy a Home/Gerald Celente

Thought I would throw up a few videos.

The first one makes some great points around why renting a home makes more sense then buying one:




Gerald Celente:  The Greatest Depression.

It's always interesting to hear from the Trends Research Institute's founder.  Gerald discusses a variety of topics here and his trends forecast continues to be quite gloomy.

One alarming sound bite was the fact that the top 10% owns 93% of the assets in this country. 

Some great stuff here. 

Enjoy!



Part 2



Part 3